New Research Suggests Poor Consumers Subsidize the Wealthier Ones

A controversial study from researchers affiliated with the Federal Reserve Bank of Boston suggests that lower income consumers who generally use more cash and debit cards subsidize the credit card use and rewards of wealthier consumers.

Scott Schuh and two other researchers affiliated with both the bank and the Consumer Payments Research Center authored, "Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations." Schuh is a senior economist with the bank's research department.

"On average, each cash buyer pays $151 to card users and each card buyer receives $1,482 from cash users every year, a total transfer of $1,633 from the average cash payer to the average card payer" the researchers said.

"On average, and after accounting for rewards paid to households by banks, when all households are divided into two income groups, each low-income household pays $9 to high-income households and each high-income household receives $434 from low-income households every year. The magnitude of this transfer is even greater when household income is divided into seven categories: on average, the lowest-income household (< $20, 000 annually) pays a transfer of $23 and the highest-income household ($150,000 annually) receives a subsidy of $756 every year," the report added.

The researchers stressed that neither credit card issuers nor the card brands set out to establishe these sorts of alleged inequalities between cards and cash but added that the existence could present economic issues that may interest policy makers.

Some economic research has long held that consumers that use cash, debit cards or even other credit cards subsidize credit card rewards programs. This paper is the first to attempt to quantify the amount of the subsidy, the authors wrote.

They also

acknowledged that the paper was somewhat constrained in its perspective. For example, the study looked only at the interchange aspect of card income and not the finance charge, even though the finance charge is the largest aspect of card income and arguably provides the largest source of income supporting rewards programs.

And the study has its critics. The Electronic Payment's Coalition, a group of card issuers and card brands formed to defend the current payment system that includes credit union participants, pointed out that if poorer consumers are subsidizing wealthier ones, that was in part because merchants didn't offer discounts for cash purchases, something they could already do.

"Merchants have always been able to offer discounts for cash-both by federal law and in all agreements with card networks," wrote Trish Wexler, a spokesman for the EPC.

"But as this study shows, very few merchants take advantage of this option-clearly opting to keep the difference for themselves in the form of higher profits. It is, in fact, retailers themselves who are forcing cash users to pay more than necessary by not offering them a discount-and in effect, paying for those who pay with credit. Cash users should insist on discounts at their retailers. Nothing is prohibiting merchants from offering discounts for cash-they simply don't want to do it."

Wexler also contended that all consumers, especially low-income consumers, benefited from the way the use of credit cards had helped lower the costs of goods and services overall.

"Merchants make more money and save on other expenses when they accept card-it's a net benefit to them. Therefore, cash customers actually benefit from the increased use of credit cards, for prices of goods and services can be lowered for all customers due to the net benefit offered to retailers by card acceptance," Wexler argued.